Clientelism, income inequality, and social preferences: an evolutionary approach to poverty traps

Political clientelism is a dyadic relation in which a politician (the patron) gives material goods and services to a citizen (the client), in exchange for political support. We argue that there is a two-way relation between clientelism and income inequality and poverty. In a poor society in which income inequality is high, clientelism will be a natural outcome. Once clientelism is established, it is harder for democracy to redistribute income and it is easier for the society to be caught in a poverty trap. We develop a two-part game-theoretic model. In the first part, clientelism emerges in a poor and unequal society as a consequence of social preferences, in particular, strong reciprocity. In the second part, using evolutionary and stochastic game theory, we show that clientelism causes income inequality and poverty.

Clientelism, Income Inequality, and Social Preferences: an Evolutionary Approach to Poverty Traps *

Abstract Political clientelism is a dyadic relation in which a politician (the patron) gives material goods and services to a citizen (the client), in exchange for political support. We argue that there is a two-way relation between clientelism and income inequality and poverty. In a poor society in which income inequality is high, clientelism will be a natural outcome. Once clientelism is established, it is harder for democracy to redistribute income and it is easier for the society to be caught in a poverty trap. We develop a two-part game-theoretic model. In the first part, clientelism emerges in a poor and unequal society as a consequence of social preferences, in particular, strong reciprocity. In the second part, using evolutionary and stochastic game theory, we show that clientelism causes income inequality and poverty

The production function methodology for calculating potential growth rates and output gaps

The concepts of potential growth and the output gap form a crucial part of the toolkit for assessing the cyclical position of the economy and its productive capacity. These concepts have become an essential ingredient of the fiscal surveillance process emanating from the Stability and Growth Pact. Estimating the output gap is difficult since potential growth is not directly observable whilst actual GDP is subject to significant historical / forecast revisions. Given the large uncertainty surrounding output gap estimates, due care must be taken in interpreting their size and evolution. Whilst mindful of these uncertainties, the potential growth and output gap forecasts produced by the ECOFIN Council approved production function (PF) methodology have been providing essential information to policy makers since their initial release in 2002. This information has been used by policy makers for their ongoing discussions regarding the appropriate mix of macroeconomic and structural policies in the various EU economies, with the former geared to eliminating cyclical slack and the latter being used to raise the output potential of their respective economies. Given the importance of this work, the EU's Economic Policy Committee has a dedicated working group (i.e. the "Output Gap Working Group" - OGWG) which meets regularly to discuss the operational effectiveness & relevance of the existing PF methodology. Periodically, the Commission services produce a paper which tries to succinctly summarise the work of the OGWG over a specific period of time, with the present paper updating the last published paper on this topic which appeared in 2006JRC.G.3-Econometrics and applied statistic

Drivers of the Post-Crisis Slump in the Eurozone and the US

The Global Crisis led to a sharp contraction and long-lasting slump in both Eurozone and US real activity, but the post-crisis adjustment in the Eurozone and the US shows striking differences. This column argues that financial shocks were key determinants of the 2008-09 Great Recession, for both the Eurozone and the US. The post-2009 slump in the Eurozone mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment linked to the poor health of the Eurozone financial system. Mono-causal explanations of the persistent slump are thus insufficient. Adverse financial shocks were less persistent for the US

Comparing post-crisis dynamics across Euro Area countries with the Global Multi-country model

Abstract Following the global financial crisis, the Euro Area (EA) has experienced a persistent slump and notable trade balance adjustments, but with pronounced differences across EA Member States. We estimate a multi-country structural macroeconomic model to assess and compare the main drivers of GDP growth and trade balance adjustment across Germany, France, Italy, and Spain. We find that the pronounced post-crisis slump in Italy and Spain was mainly driven by positive saving shocks ('deleveraging') and by an increase in investment and intra-euro risk premia. Fiscal austerity in Spain and the productivity slowdown in Italy have been additional sizable contributors to the economic downturn. The results further suggest that euro depreciation, heightened intra-euro risk premia and subdued investment had a sizable impact on the trade balance reversals in Italy and Spain, which has been offset in France by a strong increase in imports and lower exports

Topics in macroeconomics and finance

The thesis consists of four chapters. The introductory chapter clarifies different notions of rationality used by economists and gives a summary of the remainder of the thesis. Chapter 2 proposes an explanation for the common empirical observation of the coexistence of infrequently-changing regular price ceilings and promotion-like price patterns. The results derive from enriching an otherwise standard, albeit stylized, general equilibrium model with two elements. First, the consumer-producer interaction is modeled in the spirit of the price dispersion literature, by introducing oligopolistic markets, consumer search costs and heterogeneity. Second, consumers are assumed to be boundedly-rational: In order to incorporate new information about the general price level, they have to incur a small cognitive cost. The decision whether to re-optimize or act according to the obsolete knowledge about prices is itself a result of optimization. It is shown that in this economy, individual retail prices are capped below the monopoly price, but are otherwise flexible. Moreover, they have the following three properties: 1) An individual price has a positive probability of being equal to the ceiling. 2) Prices have a tendency to fall below the ceiling and then be reset back to the cap value. 3) The ceiling remains constant for extended time intervals even when the mean rate of inflation is positive. Properties 1) and 2) can be associated with promotions and properties 1) and 3) imply the emergence of nominal price rigidity. The results do not rely on any type of direct costs of price adjustment. Instead, price stickiness derives from frictions on the consumers’ side of the market, in line with the results of several managerial surveys. It is shown that the developed theory, compared to the classic menu costs-based approach, does better in matching the stylized facts about the reaction of individual prices to inflation. In terms of quantitative assessment, the model, when calibrated to realistic parameter values, produces median price ceiling durations that match values reported in empirical studies.The starting point of the essay in Chapter 3 is the observation that the baseline New-Keynesian model, which relies solely on the notion of infrequent price adjustment, cannot account for the observed degree of inflation sluggishness. Therefore, it is a common practice among macro- modelers to introduce an ad hoc additional source of persistence to their models, by assuming that price setters, when adjusting a price of their product, do not set it equal to its unobserved individual optimal level, but instead catch up with the optimal price only gradually. In the paper, a model of incomplete adjustment is built which allows for explicitly testing whether price-setters adjust to the shocks to the unobserved optimal price only gradually and, if so, measure the speed of the catching up process. According to the author, a similar test has not been performed before. It is found that new prices do not generally match their estimated optimal level. However, only in some sectors, e.g. for some industrial goods and services, prices adjust to this level gradually, which should add to the aggregate inflation sluggishness. In other sectors, particularly food, price-setters seem to overreact to shocks, with new prices overshooting the optimal level. These sectors are likely to contribute to decreasing the aggregate inflation sluggishness. Overall, these findings are consistent with the view that price-setters are boundedly-rational. However, they do not provide clear-cut support for the existence of an additional source of inflation persistence due to gradual individual price adjustment. Instead, they suggest that general equilibrium macroeconomic models may need to include at least two types of production sectors, characterized by a contrasting behavior of price-setters. An additional finding stemming from this work is that the idiosyncratic component of the optimal individual price is well approximated by a random walk. This is in line with the assumptions maintained in most of the theoretical literature. Chapter 4 of the thesis has been co-authored by Julia Lendvai. In this paper a full-fledged production economy model with Kahneman and Tversky’s Prospect Theory features is constructed. The agents’ objective function is assumed to be a weighted sum of the usual utility over consumption and leisure and the utility over relative changes of agents’ wealth. It is also assumed that agents are loss-averse: They are more sensitive to wealth losses than to gains. Apart from the changes in the utility, the model is set-up in a standard Real Business Cycle framework. The authors study prices of stocks and risk-free bonds in this economy. Their work shows that under plausible parameterizations of the objective function, the model is able to explain a wide set of unconditional asset return moments, including the mean return on risk-free bonds, equity premium and the Sharpe Ratio. When the degree of loss aversion in the model is additionally assumed to be state-dependent, the model also produces countercyclical risk premia. This helps it match an array of conditional moments and in particular the predictability pattern of stock returns.Doctorat en Sciences économiques et de gestioninfo:eu-repo/semantics/nonPublishe

kountry: A Stata utility for merging cross-country data from multiple sources

This article describes kountry, a data-management command that can be used to translate one country-coding scheme into another, to recode country names into a “standardized form”, and to generate geographic-region variables. Users can build a custom dictionary through a helper command, kountryadd, that “teaches” kountry new name variations. The dictionary can be protected from an accidental overwriting through two helper commands: kountrybackup and kountryrestore

Right-censored Poisson regression model

I present the rcpoisson command for right-censored count-data models with a constant (Terza 1985, Economics Letters 18: 361–365) and variable censoring threshold (Caudill and Mixon 1995, Empirical Economics 20: 183–196). I show the effects of censoring on estimation results by comparing the censored Poisson model with the uncensored one

Graphical representation of multivariate data using Chernoff faces

Chernoff (1971, Technical Report 71, Department of Statistics, Stanford University; 1973, Journal of the American Statistical Association 68: 361–368) proposed the use of cartoon-like faces to represent points in k dimensions. This article describes a Stata implementation of a face-generating algorithm using the method proposed by Flury (1980, Technical Report 3, Institute of Mathematical Statistics and Actuarial Science, Bern University), Schüpbach (1987, Technical Report 25, Institute of Mathematical Statistics and Acturial Science, Bern University), and Friendly (1991, http://www.math.yorku.ca/SCS/sasmac/faces.html). I present examples of applying Chernoff faces to data clustering and outlier detection

kountry: A Stata utility for merging cross-country data from multiple sources

This article describes kountry, a data-management command that can be used to translate one country-coding scheme into another, to recode country names into a "standardized form", and to generate geographic-region variables. Users can build a custom dictionary through a helper command, kountryadd, that "teaches" kountry new name variations. The dictionary can be protected from an accidental overwriting through two helper commands: kountrybackup and kountryrestore. Copyright 2008 by StataCorp LP.kountry, kountryadd, kountrybackup, kountryrestore, country names, country-coding schemes, geographical, region